The current domestic, legal, reported cash market is reported to include 300 billion transactions totaling $1 trillion per annum. According to some estimates, seventy-five percent (75%) of those transactions involve payments of less than $20. Many financial institutions, credit card companies, merchants and consumers would prefer that these payments be made electronically. However, other than for transit applications, electronic payments for small value transactions have achieved minimal consumer penetration.
Current credit/debit processes were optimized for larger value payments. The level of service for larger value payments cannot be supported by small value transactions. Since small value payments cannot support the service levels normal for typical credit/debit cards, there must be a means to communicate lower service level expectations to consumers. It would be very hard to educate consumers that the same card they have used for decades has two different service levels. Therefore, use of a different token may help consumers identify the difference.
Technologically new payments mechanisms have often been frustrated by the ‘chicken or the egg’ conundrum. Until there are lots of consumers with the new devices, merchants are reluctant to pay the cost of installing new readers for the technology. Similarly, consumers are reluctant to carry new devices until there are enough merchants to accept them. Despite increasing fraud associated with criminals ‘stripping’ the information from magnetic-stripe cards, the card associations have failed to deploy more secure alternatives. Smartcards are just one example of the devices that have failed to gain traction.
RFID technology is very broadly used today. RFID are currently used to identify cattle, packages, and owners of vehicles and for some payments (e.g., the 5MM active Exxon Mobil SpeedPass™). The technology is available in at least two forms, active and passive RFID devices.
E-Z Pass™ is an example of an active RFID device. In order to permit cars to be recognized at speeds up to 200 MPH, such active RFID devices have a battery and in response to a signal from readers, transmit a signal that can be recognized from a distance (e.g., 40 meters) from the reader. At such distances, it is important that only the intended vehicle is charged for the toll. As a consequence, technology is focused on tracking a particular vehicle within a specific lane of traffic.
Another implementation of RFID technology involves passive devices. Passive RFID devices have no battery. These devices contain chips and an antenna. When the passive RFID device is in proximity of a reader, usually within inches but can be feet away, the chip is activated by an RF signal sent by the reader. The reader's broadcast RF signal is captured by the passive device's antenna and generates sufficient electrical energy to activate the chip. The passive RFID chip is hardwired to respond in a particular way, to be recognized by the reader. Certain mass-transit cards are an example of a passive RFID device.
Payments using RFID devices are beginning to emerge, though there are several impediments. Merchants have balked at the $5,000-15,000 cost of installing RFID readers, because there are few RFID enabled consumers, and issuers are reluctant to distribute tokens (at a cost of upwards of $8 each) unless there are enough merchants to generate sizeable payments.
Other drawbacks may also be present.